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2 C H A P T E R 1 FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS LEARNING OBJECTIVES After studying this chapter, you should be able to: Identify the major financial statements and other means of financial reporting. Explain how accounting assists in the efficient use of scarce resources. Describe some of the challenges facing accounting. Identify the objectives of financial reporting. Explain the need for accounting standards. Identify the major policy-setting bodies and their role in the standard-setting process. Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Describe the impact of user groups on the rule-making process. Understand issues related to ethics and financial accounting. 9 8 7 6 5 4 3 2 1 One might take pride in the fact that the U.S. system of finan- cial reporting has long been the most robust and transparent in the world. But most would also comment that we can do better, particularly in light of the many accounting scandals that have occurred at compa- nies like AIG , Enron , and WorldCom . So it is time for reevaluation—a time to step back and evaluate whether changes are necessary in the U.S. financial reporting system. In doing so, perhaps it is time to “think outside the box.” Here are some thoughts: 1. Today, equity securities are broadly held, with approximately half of American households investing in stocks. This presents a challenge—investors have expressed concerns that one-size-fits-all financial reports do not meet the needs of the spectrum of investors who rely on those reports. Many individual investors are more interested in summarized, plain-English reports that are easily understandable; they may not understand all of the underlying detail included in current financial reports. On the other hand, market analysts and other investment professionals may desire information at a far more detailed level than is currently provided. Technology certainly must play a role in delivering the cus- tomized level of information that the different types of investors desire. 2. Aside from investors’ concerns, companies have expressed concerns with the complexity of our current financial reporting system. Many companies assert that when preparing financial reports, it is difficult to ensure compliance with the voluminous and complex requirements contained in U.S. GAAP and SEC reporting rules. In fact, in 2007 almost 10 percent of U.S. public companies restated prior financial reports. This alarmingly high Thinking Outside the Box PDF Watermark Remover DEMO : Purchase from www.PDFWatermarkRemover.com to remove the watermark
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3 number is a problem because it can be difficult to distinguish between companies with serious underlying problems and those with unintentional misapplications of complex and nuanced accounting literature. Restatements are costly to companies and can undermine the confidence of investors in the financial reporting system.
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